Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show the information for two potential comparable companies. Calculate the unlevered cost of capital based on the following assumptions. Neither company expects its free cash flows to grow. Income tax rate for interest (TINT) Value of debt Value of preferred stock. Value of equity Maturity of debt (years) Debt cost of capital Preferred stock cost of capital. Equity cost of capital Low Leverage Company 35.0% $ 4,000 $ 1,000 $15,000 Perpetual 5.0% 6.0% 11.8% High Leverage Company 45.0% $45,000 $ 0 $ 5,000 Perpetual 8.0% 28.0% a. b. C. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered cost of capital. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt. Assume that interest is tax deductible but that the company refinances its debt at the end of each year (annual refinancing).
Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show the information for two potential comparable companies. Calculate the unlevered cost of capital based on the following assumptions. Neither company expects its free cash flows to grow. Income tax rate for interest (TINT) Value of debt Value of preferred stock. Value of equity Maturity of debt (years) Debt cost of capital Preferred stock cost of capital. Equity cost of capital Low Leverage Company 35.0% $ 4,000 $ 1,000 $15,000 Perpetual 5.0% 6.0% 11.8% High Leverage Company 45.0% $45,000 $ 0 $ 5,000 Perpetual 8.0% 28.0% a. b. C. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered cost of capital. Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt. Assume that interest is tax deductible but that the company refinances its debt at the end of each year (annual refinancing).
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter13: Capital Structure And Leverage
Section: Chapter Questions
Problem 14SP: WACC AND OPTIMAL CAPITAL STRUCTURE Elliott Athletics is trying to determine its optimal capital...
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Transcribed Image Text:Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show
the information for two potential comparable companies. Calculate the unlevered cost of capital based on the
following assumptions. Neither company expects its free cash flows to grow.
Income tax rate for interest (TINT).
Value of debt
Value of preferred stock.
Value of equity
Maturity of debt (years)
Debt cost of capital
Preferred stock cost of capital.
Equity cost of capital.
Low Leverage
Company
35.0%
$ 4,000
$ 1,000
$15,000
Perpetual
5.0%
6.0%
11.8%
High Leverage
Company
45.0%
$45,000
$
0
$ 5,000
Perpetual
8.0%
28.0%
a.
b.
C.
Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered
cost of capital.
Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt.
Assume that interest is tax deductible but that the company refinances its debt at the end of each year
(annual refinancing).
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